Rather than storing your IMAP and SMTP passwords in plain text on disk, you can store them encrypted using GnuPG, OpenSSL, the GNOME Keyring, or any other method of password storage encryption. It still requires a "master password" from you to decrypt the file(s) on the fly, and set the appropriate passwords, but then it will remain in RAM in plain text for the duration Mutt is running, and no worries about the password in plain text going to disk.
Here's how I set mine up using my GnuPG key. First, I created a ~/.mutt/passwords file. The file is in plain text. Before encrypting it, here are its contents:
set imap_pass="password" set smtp_pass="password"
I then encrypt that file with the following command:
% gpg -r email@example.com -e ~/.mutt/passwords % ls ~/.mutt/passwords* /home/user/.mutt/passwords /home/user/.mutt/passwords.gpg % shred ~/.mutt/passwords % rm ~/.mutt/passwords
The last two commands are to ensure that the temporary file you created for encryption is securely wiped from the disk using the GNU Shred utility. Now, you should only have an encrypted binary data file that contains your passwords. All that is left is to configure Mutt to decrypt them when starting up. You can set that easily in your Muttrc:
source "gpg -d ~/.mutt/passwords.gpg |"
The string is just a standard string. Also, it's important to have "|" at the end of the command, to pipe the output to Mutt, so it can be appropriately sourced.
At this point, you should be able to launch Mutt, be asked for the passphrase for your private GnuPG key, and it should log you in to your IMAP account. You should also be able to send mail as normal, logging automatically into your SMTP account. The only time you are asked for a password, is your GnuPG passphrase when starting Mutt. If your "gpg-agent" is already running, and you've configured GnuPG to use the agent and added your private key to it, then starting Mutt won't ask you for your key passphrase, and will use the agent instead.
Other than temporarily creating the plain text file to encrypt, which stores your passwords, and which you promptly and securely shred later, your IMAP/SMTP passwords for your remote account are never on disk in plain text.
Happy encrypted hacking!